The writer is the author of ‘Two Hundred Years of Muddling Through: The Surprising Story of the British Economy’
It is becoming worryingly easy to use the dread phrase “the 1970s” when discussing Britain’s economy. Inflation has been persistently high, industrial unrest continues to dominate the news agenda and all against a backdrop of an energy price surge and a government that seems to be stumbling from crisis to crisis. The presence of adverts for an ABBA concert, admittedly in holographic form, across the tube network adds to the sense that the UK has stepped back five decades to a time that has become a byword for economic failure.
The comparison though, whilst superficially attractive, is often overdone. Britain certainly has an inflation problem. Headline inflation was still above 10 per cent in the UK in March compared to 7.8 per cent in Germany or 6.6 per cent in France. For two months in a row the headline rate has stubbornly refused to fall as much as analysts expected. More alarmingly core inflation, excluding volatile components such as food and energy prices, remains above 6 per cent as does service price inflation, which is often seen as the best gauge of domestically driven price pressure. All of that will be enough to ensure the Bank of England feels the need to press on with its tightening of monetary policy.
But the story has shifted from being one of inflation soaring ever higher to one of it failing to come down as quickly as expected. That is far from a comfortable place to be, but it at least shows some signs of progress. Few doubt that headline inflation should drop sharply in the months ahead as the impact of the 2021-22 energy price surge begins to fade out of the numbers.
What will happen with core inflation is less clear. There has been much talk of a 1970s-style wage-price spiral. The fear was that workers would bid up their pay in an attempt to protect their incomes but, by doing so, force firms to engage in a further round of price rises. Annual wage growth did rise as lockdowns eased in 2021 and reopening firms struggled to fill vacancies. In recent months though, as growth has slowed and the number of vacancies has fallen, wage growth has decelerated. The result has been wage pressure strong enough to add to business costs and core inflation but nowhere near strong enough to protect real household incomes, which have undergone a sharp squeeze.
The problem with the easy 1970s story is that the labour market of the 2020s is not the labour market of that decade. Trade unions are weaker by an order of magnitude — around one in five British workers are members today compared to over half at their peak. The legislation of the 1980s and 1990s created a much more liberal jobs market. The bargaining power of labour is structurally lower than it once was.
The sad truth is that there is no simple answer to the question, “What is afflicting Britain’s economy?” Instead, a multitude of interrelated crises is playing out at the same time. The global energy price spike and all the disruptions wrought by the pandemic are of course immediate factors and the UK has been hit especially hard by both. In the aftermath of Covid-19, NHS waiting lists for appointments and routine operations have risen to about 7mn — a 75 per cent increase on 2019.
That has become a macroeconomic problem, with 6 per cent of working-age people now reporting themselves too sick to work. The strikes across transport and the public sector, in response to falling real pay, have also taken on macroeconomic significance with the annual number of working days lost hitting its highest levels since the 1990s.
Then there is Brexit. Following the 2016 referendum, many firms either cancelled or postponed capital spending plans whilst they awaited clarity on what Britain’s new trading arrangements would look like. That uncertainty led to a shortfall in business investment. The new trading arrangements themselves represent frictions in a previously frictionless trade border, weakening productivity and economic growth over the long run and adding to price pressures now at the margin.
But the problems predate 2016, too. Productivity growth, the ultimate driver of both economic growth and living standards, has been abysmal since 2008. It is this underlying crisis that has left real expected household incomes no higher in the mid-2020s than a decade and a half earlier.
On one important level, the 1970s analogy contains important truths. Then, as now, the government was forced to deal with concurrent crises that called for different, and often incompatible, policy responses. British governments in that decade were overwhelmed not just by the oil price spike and a wage-price spiral but by a half dozen other problems too, from the breakdown of Bretton Woods to a housing market boom and bust.
The current government now risks being equally overwhelmed by managing the continuing economic fallout from the pandemic at the same time as an energy price crisis, alongside Brexit, against a backdrop of 15 years of weak growth and with the challenge of the net zero transition ahead. The real 1970s feeling for policymakers is one of almost constant firefighting.